What does Trump's RMD Review Mean for FAs and Their Clients?

Advisors and clients may be wondering about the implications of President Donald Trump’s August 31 executive order calling for a review of rules governing retirement and small business 401(k) plans. And some FAs say changes may be in store.

Trump issued “Executive Order on Strengthening Retirement Security in America” in an apparent bid to improve retirement savings across three fronts. First, the EO directs the Department of Labor to ease regulations around ‘multiple-employer retirement plans’ and grant greater ease of access to small businesses. The order also calls on the Treasury Department to review a longstanding rule forcing investors to withdraw taxable funds from their retirement accounts starting when they turn 70½ years old. Lastly, the EO tasks regulators with examining the electronic distribution of disclosures and statements, as well as other documents.

The Treasury has been asked to look at RMD rules to allow for more flexibility around when retirement savings must be accessed, John Martin, senior vice president of CAPTRUST, says. The RMD was last reviewed in 2002, he says.

According to theIRS, RMDs are minimum amounts a retirement plan account owner must withdraw annually starting the year they turn 70 ½, and Martin says they exist to let the government tax these funds. So, as people live longer, the period they can be taxed after 70 ½ extends. This means both the amount of time they can be taxed extends and the amount of money they may end up paying increases. Martin says even if the 70 ½ age trigger is not moved, advisors can at the very least expect to see the calculus surrounding how RMDs are calculated be altered, which could force FAs to change retirement plan allocations.

The review is expected to take 180 days from the August 31 launch date, at which point the Department of Labor will determine if RMD minimum distribution rules should be updated to reflect current mortality data, according to a press release from the White House. The treasury secretary will also determine if updates to RMD distribution rules should be made on an annual or a periodic basis. The EO also directs government departments to discuss expanded access and qualification requirements for multiple employers plans within 180-days.

The third aspect of the review looks to improve the effectiveness and reduce the costs associated with account notices and disclosures. The Secretary of Labor in consultation with the Secretary of the Treasury are tasked to complete the review by August 31 of 2019.

U.S. Secretary of Labor Alexander Acostasays the review will “help provide greater opportunities for workers to save for the future and retirement.” But not all experts think the EO will effect any meaningful change.

Alicia Munnell, director of the Center for Retirement Research at Boston College, says targeting the RMD age in an executive order “came out of left field.” Munnell thinks the government should make sure RMD life expectancy tables are up to date, remove RMD requirements from accounts with less than $250,000, and decrease the penalty for not meeting the 70 ½ payment age. However, Munnell says she does not believe the White House is thinking about these possibilities. Instead, they are thinking about whether retirement savers should be able to get benefits at 70 ½ or 73. And simply moving the RMD age may not be a good idea, she says.

Pushing the age back is “unnecessary and undesirable,” because the presumption is that people don’t need the money, despite the government wanting people to use their retirement savings at retirement, she says, and forcing people to take money out of their retirement accounts gives them a nudge in the right direction, she says. Munnell also notes only 23% of men and 17% of women are working at 70 ½ and people who are still working at 70 ½ are exempt under current law from tapping retirement balances with their current employers, so they don’t probably don’t need to tap their balances anyway.

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But for financial advisors, Erik Daley, managing principal of Multnomah Group, says the RMD review means he may have to examine the design of retirement plans and do more client education on changes needed for the plan. Specifically, Daley says a modified RMD age may impact investment time-horizons and impact asset allocation choices.

Advisors must become well-versed about the EO and know what is being considered in the revisions and why, Martin says. While he has yet to receive any calls about the proposed changes in legislation from his clients – which he anticipates won’t happen immediately – he says he will be proactively speaking with clients during the third quarter about the revision and its implications.

Legislation targeting multiple employer plans was originally introduced in March of 2018 and is currently making its way through the House of Representatives, which Munnell says has mainly shown it bipartisan support.